Will Cryptocurrency Replace Money?
When Bitcoin first came out in 2009, cryptocurrency was touted as the future of currency. Proponents were acting like it was only a matter of time before Bitcoin would revolutionize, if not outright replace, fiat currency. Over a decade later, it’s business as usual. We’re all still using paper money while cryptocurrency, (including Bitcoin) remains a fringe pursuit by only the most fervent adopters and futurists.
So what happened? What’s holding cryptocurrency back? Why hasn’t it replaced traditional currency to the point where it’s everyone’s preferred method of payment? Should that even happen? Let’s get to the bottom of these burning questions.
In This Article:
Why Cryptocurrency Should Replace Fiat Currency
Even though cryptocurrency has yet to overtake fiat currency as the world’s dominant form of exchange, there are several qualities that not only make crypto attractive as an investment but also as the currency of the future.
So far, there are over 18 million Bitcoins in circulation and once there are 21 million, no more Bitcoins will ever be produced. This is a good thing if you’re hoping Bitcoin or some other cryptocurrency will take over fiat currency, as it’s immune to hyperinflation because it will not be made in massive quantities that would devalue it.
As a result, Bitcoin as well as other cryptocurrencies that are becoming more popular, based on their principles, can’t experience inflation rates seen historically in countries like Germany, Venezuela and Zimbabwe. However, inflation is rare and isn’t really a big concern enough to suddenly change from fiat currency to cryptocurrency. Even though Bitcoin is inflation-proof due to its limited supply, a limited supply also makes it difficult to stop deflation when prices for goods become really, really cheap.
It should be noted that economists have yet to decide what level of inflation or deflation is desirable for currency and whether inflation or deflation is a good thing or not. We may have to take a “wait and see” approach to really know how Bitcoin would be affected by deflation if ever or at all. Still, deflation is a potential vulnerability even if Bitcoin is protected against inflation.
No Take Backs
Every cryptocurrency transaction is permanent and irreversible. Every cryptocurrency transaction is recorded in a blockchain – basically a computational ledger – so no central authority could ever seize your Bitcoin or delete it and claim you never had it in the first place. Anyone could go back and see how much Bitcoin you had and when. This also makes transactions more secure and verifiable, as no one can use the same Bitcoins for multiple transactions or doctor the amount of cryptocurrency they actually have.
While the two previous reasons that cryptocurrency should take over fiat currency are theoretical, as hyperinflation and the seizure of assets by a bank or central authority are rare, anonymity is the single practical reason proponents say cryptocurrency should be the money of the future.
Of course, these are people who don’t want a central authority like a bank, credit card company or the government knowing what they’re using their money for. While in some ways this may be seen as an advantage, especially if you’re more of an individualist, it can also facilitate criminal activity. A 2019 study showed 46% of Bitcoin transactions were involved in illegal activity accounting for $76 billion per year.
Cryptocurrency is Taxable
Just like traditional currency, cryptocurrency is taxed, which lends it credibility and legitimacy as an asset among governments and arguably puts it on the road towards replacing traditional currency.
While cryptocurrency isn’t recognized as legal tender in Canada, it is taxed as business income or as capital gains. Proceeds gained from trading cryptocurrency must be reported to the CRA and if you fail to report proceeds gained through cryptocurrency trading, you open yourself up to being audited.
Why Cryptocurrency Should Not Replace Fiat Currency
Probably the number one reason cryptocurrency has not replaced fiat currency as our modern money is cryptocurrency’s penchant for volatility.
Nations of the world would much rather have a stable currency – a sign of a healthy economy – rather than a currency that goes up and down constantly. Studies show that Bitcoin changed its value in U.S. dollars by 2.22% in December 2020, making it much more akin to speculative investment, rather than a true means of exchange that can be relied on for a consistent value.
It’s because of its volatility that cryptocurrency misses out on being given a true asset class, as it is impossible to generate cash flow with cryptocurrency. Cryptocurrency also does not contribute to the growth of a country’s economy and doesn’t count toward GDP. In Canada, all major banks (other than National Bank) don’t provide their debit or credit cards for the purchase of Bitcoin and the government doesn’t recognize it as legal tender. This is largely because of its volatility. If it doesn’t seriously address that major value problem, no one will take cryptocurrency seriously as a viable global currency.
Expensive Transaction Fees
Cryptocurrency is great for anonymous transactions, but you are paying for that privilege. The average transaction fee for cryptocurrency transactions is quite high. In early July 2021, the average sat at $7.046 USD, but it was as high as $23.13 on May 23, 2021. In addition to the high cost of cryptocurrency in general, the expensive transaction fees are yet another barrier to entry for making crypto mainstream currency.
Cryptocurrency Needs a Vulnerable Third Party to be Viable
Unless you’re a computer programmer or have a degree in computer science, executing a cryptocurrency transfer into a fiat currency or to your digital wallet is logistically complicated without a third party such as an exchange. These exchanges, however, are highly vulnerable to hacking. In 2019, a new record was set as 12 cryptocurrency exchanges were hacked.
The frequency of these hacks and the need for users to be responsible for the security of their funds means cryptocurrency has no chance of replacing fiat currency until it’s harder to steal, easier to recover, and simpler to protect from scams and fraud.
The Third Option: Alternatives to Cryptocurrency in Contention
If cryptocurrency never usurps traditional paper money entirely, that doesn’t mean there won’t possibly be more stable alternatives that borrow the best cryptocurrency concepts.
A Stablecoin is a type of cryptocurrency that tries to control crypto’s notorious volatility by tying its own value to another asset or collection of assets. Unlike other cryptos with fluctuating exchange rates, stablecoins have a fixed exchange rate because the rate is tied to the guarantee of a central authority.
The best example of a stablecoin is Tether. Initially, it was claimed it was backed 1:1 to the U.S. dollar and traded as such. But, in recent court filings, it was revealed it is actually backed by cash and short-term securities equal to 74 percent of the outstanding coins (still more stable than other cryptocurrencies).
Central Bank Digital Currencies (CBDC)
A CBDC is simply a form of a digital currency issued by a central bank. Most fiat currencies can already be used digitally, but CBDCs serve other purposes, including:
- making central bank lending publicly available
- make paying for things across the country easier or,
- transaction tracking for an authoritarian government to enforce the law
Right now in 2021, China is the first developed economy testing a CBDC beyond a theoretical white paper. The digital renminbi (Digital RMB) can be decoupled from the banking system eventually so tourists can use it and can be spent directly at popular merchants like McDonald’s or transferred into a bank account and controlled by a smartphone banking app. It has equivalent value to the non-digital forms of the renminbi.
Will Cryptocurrency Actually Take Over Fiat Currency?
The short answer is no. At least, not anytime soon. It needs to overcome its volatility and complicated usability so it can be more easily adopted for practical transactions outside of speculative investing. While there’s a lot of investor enthusiasm and several businesses accepting cryptocurrencies, mainstream economists don’t have a very high opinion of the financial instrument. Many banks will not allow their financial resources to be used to buy cryptocurrency due to its volatility and banks have no plans to abandon fiat currency, even if they are borrowing elements of blockchain technology to improve banking security and privacy.
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